Plunge into red is blow to leader's health pledge

Britain's public finances sank deeply into the red last month, causing City analysts yesterday to scale back estimates of the size of Gordon Brown's war chest going into the next election.

Official figures released yesterday showed an unexpectedly large budget deficit of £9.2bn in December. Although the public finances are still expected to be in the black for the financial year as a whole, last month's setback means that predictions of a £10bn surplus look unlikely.

Treasury figures suggest Mr Brown is already facing an uphill struggle finding the cash to meet Tony Blair's pledge, on last Sunday's Frost programme, to raise NHS funding by 5% so as to bring Britain's spending on health into line with the rest of the European Union.

Although the treasury may be able to afford to increase spending by 5% a year in the new three-year spending plans due to be unveiled in the summer, it will not be enough to increase the proportion of GDP devoted to health from the current level of 6.8% to the EU average of 8%. A 5% a year increase will still leave a gap of 0.8% of GDP, equivalent to more than £5bn, according to treasury figures.

To fulfil Mr Blair's pledge, public spending would need to rise by around an unprecedented 6% a year. Even that would be insufficient to match the resources devoted to health by the big European economies. To catch up with Germany and France, Britain would need to spend more than 8% more a year over the next three years.

Sources close to the treasury suggest that it was fully prepared for Mr Blair's promise to increase health spending in real terms by 5% a year.

But officials are thought to have been surprised by his assertion that this would be enough to raise spending as a proportion of GDP to the European average. This may explain why the treasury, and subsequently Downing Street, were keen to water down the prime minister's pledge to an aspiration in subsequent briefings.

Last month's shortfall between government spending and income was double the figure in City forecasts. Analysts said it reflected weaker revenue growth from taxes and a pick-up in departmental spending. Cumulatively, the budget deficit for the financial year 1999-2000, which ends in April, stands at £4.3bn, a £5.4bn deterioration from the same point last year.

David Walton, of the US investment bank Goldman Sachs, said December's figures were distorted by one-off factors: a lack of proceeds from the windfall tax this year compared with last year, and a temporary lift last year due to early payment of tobacco duties to beat a pre-announced increase at the turn of the year.

Philip Shaw of Investec bank said Mr Brown might regard the data as a blessing in disguise: "The absence of a large war chest will reduce pressure for a pre-election tax cutting spree."